(Difficulty Levels:Easy, Easy/Medium, Medium, Medium/Hard, and Hard)Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.Multiple Choice:True/alse(16 Intro) Net working capital F S Answer: bEASY1. Net working capital, defined as current assets minus the sum of payablesand accruals, is equal to the current ratio minus the quick ratio.a. Trueb. False(16 Intro) Net working capital F S Answer: bEASY2. Net working capital is defined as current assets divided by current liabilities.a. Trueb. False(16 Intro) Days of working capital F S Answer: aEASY

. !ays of working capital is the amount of net operating working capital required per dollar of daily sales.a. Trueb. False(16!) "orking capital #anage#ent F S Answer: aEASY". !etermining a firm#s optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.a. Trueb. False(16!) "orking capital financing F S Answer: bEASY$. %n increase in any current asset must be accompanied by an equal increase in some current liability.a. Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Conceptual M/C Page 1CH!"TE# $% &'#()*+ C!")T!L M!*!+EME*T(16!) $er#anent c%rr oper assets F S Answer: aEASY,. The concept of permanent current operating assets reflects the fact thatsome components of current assets do not shrink to -ero even when a business is at its seasonal or cyclical low.Thus, permanent current operating assets represent a minimum level of current assets that must be financed.a. Trueb. False(16!) &onser'ati'e fin approac( F S Answer: aEASY.. % conservative current operating asset financing approach will result inpermanent current assets and some seasonal current assets being financedusing long/term securities.a. Trueb. False(16!) Aggressi'e fin approac( F S Answer: aEASY0. %lthough short/term interest rates have historically averaged less than long/term rates, the heavy use of short/term debt is considered to be anaggressive current operating asset financing strategy because of the inherent risks of using short/term financing.a. Trueb. False(16)) &as( con'ersion cycle F S Answer: bEASY1. 2f a firm takes actions that reduce its days sales outstanding 3!456, then, other things held constant, this will lengthen its cash conversioncycle 3(((6.a. Trueb. False(16)) &as( con'ersion cycle F S Answer: bEASY1'. 5ther things held constant, if a firm 7stretches7 3i.e., delays paying6 its accounts payable, this will lengthen its cash conversion cycle 3(((6.a. Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 2 Conceptual M/C Chapter 16:Working Capital(16*) &as( b%+get F S Answer: aEASY11. 4horter/term cash budgets//say a daily cash budget for the ne8t month//are generally used for actual cash control while longer/term cash budgets//say monthly cash budgets for the ne8t year//are generally used for planning purposes.a. Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Conceptual M/C Page 3(16,) -oal of cas( #anage#ent F S Answer: aEASY12. (ash is often referred to as a 7non/earning7 asset.Thus, one goal of cash management is to minimi-e the amount of cash necessary for conducting a firm9s normal business activities.a. Trueb. False(16,) .oti'es for (ol+ing cas( F S Answer: aEASY1. Firms hold cash balances in order to complete transactions 3both routineand precautionary6 that are necessary in business operations and as compensation to banks for providing loans and services.a. Trueb. False(166) Float F S Answer: aEASY1". For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.a. Trueb. False(166) /ockbo0 F S Answer: aEASY1$. 4etting up a lockbo8 arrangement is one way for a firm to speed up the collection of payments from its customers.a. Trueb. False(161) -oal of in'entory #anage#ent F S Answer: bEASY1,. The overriding goal of inventory management is to ensure that the firm never suffers a stock/out, i.e., never runs out of an inventory item.a. Trueb. False(161) -oal of in'entory #anage#ent F S Answer: aEASY& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 4 Conceptual M/C Chapter 16:Working Capital1.. The twin goals of inventory management are 316 to ensure that the inventories needed to sustain operations are available, but 326 to hold the costs of ordering and carrying inventories to the lowest possible level.a. Trueb. False(162) 3ecei'ables balance F S Answer: aEASY10. The average accounts receivable balance is a function of both the volumeof credit sales and the days sales outstanding.a. Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Conceptual M/C Page 5(162) 3ecei'ables aging F S Answer: bEASY11. 2f a firm has a large percentage of accounts over ' days old, this is proof positive that its receivables manager is not doing a good :ob.a. Trueb. False(162) .onitoring recei'ables F S Answer: aEASY2'. The aging schedule is a commonly used method for monitoring receivables.a. Trueb. False(162) &re+it policy F S Answer: aEASY21. The four primary elements in a firm#s credit policy are 316 credit standards, 326 discounts offered, 36 credit period, and 3"6 collection policy.a. Trueb. False(162) &ollection policy F S Answer: aEASY22. (hanges in a firm#s collection policy can affect sales, working capital,and profits.a. Trueb. False(162) 4aking +isco%nts F S Answer: aEASY2. Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.a. Trueb. False(162) &(ange in cre+it policy F S Answer: aEASY2". 4uppose a firm changes its credit policy from 2;1' net ' to ;1' net '.The change is meant to meet competition, so no increase in sales ise8pected.The average accounts receivable balance will probably declineas a result of this change.a. Trueb. False(165) 4ra+e cre+it F S Answer: bEASY& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 6 Conceptual M/C Chapter 16:Working Capital2$. 2f a firm busy on terms of 2;1' net ', it should pay as early as possible during the discount period.a. Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Conceptual M/C Page 7(165) 4ra+e cre+it F S Answer: bEASY2,. Trade credit can be separated into two componentsnlimited is in a highly seasonal business, and the followingsummary balance sheet data show its assets and liabilities at peak and off/peak seasons 3in thousands of dollars6se a ,$/day year.4ales ?11','''%ccounts receivable ?1,,'''!ays sales outstanding 3!456 $.'1Benchmark days sales outstanding 3!456 2'.''a. ? 0,'.0b. ? 0,1.$c. ? 1,1.d. ?1',1.'e. ?12,',.& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 31(16)) In'entory con' perio+ & S Answer: +.EDI6.0.. Lour firm#s cost of goods sold 3(5M46 average ?2,''',''' per month, and it keeps inventory equal to $'@ of its monthly (5M4 on hand at all times.>sing a ,$/day year, what is its inventory conversion periodCa. 11.. daysb. 1.' daysc. 1"." daysd. 1$.2 dayse. 1,.. days(16)) In'entory con' perio+ & S Answer: e.EDI6.00. !ata on 4hin 2nc. for 2''0 are shown below, along with the inventory conversion period 32(A6 of the firms against which it benchmarks.The firm#s new (F5 believes that the company could reduce its inventory enough to reduce its 2(A to the benchmarks9 average.2f this were done,by how much would inventories declineC>se a ,$/day year.(ost of goods sold G ?0$,'''2nventory G ?2','''2nventory conversion period 32(A6 G 0$.00Benchmark inventory conversion period 32(A6 G 0.''a. ? .,1,b. ? 0,121c. ? 1,'2d. ?1',',e. ?11,1$1(16)) $ayables +eferral perio+ & S Answer: e.EDI6.01. !ata on =ent- 2nc. for 2''0 are shown below, along with the payables deferral period 3A!A6 for the firms against which it benchmarks. The firm#s new (F5 believes that the company could delay payments enough to increase its A!A to the benchmarks9 average.2f this were done, by how much would payables increaseC>se a ,$/day year.(ost of goods sold G ?.$,'''Aayables G ?$,'''Aayables deferral period 3A!A6 G 2".Benchmark payables deferral period G '.''a. ?.,"b. ?0"1c. ?1"d. ?1,'"0e. ?1,1,"& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 32 Prole!" Chapter 16:Working Capital(16)) &as( con'ersion cycle & S Answer: e.EDI6.1'. Lour consulting firm was recently hired to improve the performance of 4hin/4oenen 2nc, which is highly profitable but has been e8periencing cash shortages due to its high growth rate.%s one part of your analysis, you want to determine the firm9s cash conversion cycle.>singthe following information and a ,$/day year, what is the firm9s presentcash conversion cycleC%verage inventory G ?.$,'''%nnual sales G ?,'','''%nnual cost of goods sold G ?,','''%verage accounts receivable G ?1,','''%verage accounts payable G ?2$,'''a. 12'., daysb. 12,.1 daysc. 1., daysd. 1"'., dayse. 1"0.' days& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 33(16)) &as( con'ersion cycle & S Answer: +.EDI6.11. !ewey (orporation has the following data, in thousands.%ssuming a ,$/day year, what is the firm#s cash conversion cycleC%nnual sales G ?"$,'''%nnual cost of goods sold G ?1,$''2nventory G ?",'''%ccounts receivable G ?2,'''%ccounts payable G ?2,"''a. 2$ daysb. 20 daysc. 1 daysd. $ dayse. 0 days(16)) &as( con'ersion cycle & S Answer: +.EDI6.12. !esai 2nc. has the following data, in thousands.%ssuming a ,$/day year, what is the firm#s cash conversion cycleC%nnual sales G ?"$,'''%nnual cost of goods sold G ?','''2nventory G ?",$''%ccounts receivable G ?1,0''%ccounts payable G ?2,$''a. 20 daysb. 2 daysc. $ daysd. 1 dayse. " days& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 34 Prole!" Chapter 16:Working Capital(16)) &as( con'ersion cycle & S Answer: a.EDI6.1. Nervos 2nc. had the following data for 2''0 3in millions6.The new (F5 believes 316 that an improved inventory management system could lower the average inventory by ?",''', 326 that improvements in the credit department could reduce receivables by ?2,''', and 36 that the purchasing department could negotiate better credit terms and thereby increase accounts payable by ?2,'''.Furthermore, she thinks that thesechanges would not affect either sales or the costs of goods sold.2f these changes were made, by how many days would the cash conversion cycle be loweredC5riginal *evised%nnual sales< unchanged ?11',''' ?11','''(ost of goods sold< unchanged ?0',''' ?0','''%verage inventory< lowered by ?",''' ?2',''' ?1,,'''%verage receivables< lowered by ?2,''' ?1,,''' ?1",'''%verage payables< increased by ?2,''' ?1',''' ?12,'''!ays in year ,$ ,$a. ".'b. .."c. "1.2d. "$.e. "1.0& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 35(16)) &as( con'ersion cycle & S Answer: b.EDI6.1". Fdison 2nc. has annual sales of ?,,$'',''', or ?1'',''' a day on a ,$/day basis.The firm#s cost of goods sold is .$@ of sales.5n average, the company has ?1,''',''' in inventory and ?0,''',''' in accounts receivable.The firm is looking for ways to shorten its cash conversioncycle.2ts (F5 has proposed new policies that would result in a 2'@ reduction in both average inventories and accounts receivable.4he alsoanticipates that these policies would reduce sales by 1'@, while the payables deferral period would remain unchanged at $ days.=hat effectwould these policies have on the company#s cash conversion cycleC*oundto the nearest whole day.a. /2, daysb. /22 daysc. /10 daysd. /1" dayse. /11 days(16)) &as( con'ersion cycle & S Answer: e.EDI6.1$. Oan !en Borsh (orp. has annual sales of ?$',.$,''', an average inventory level of ?1$,'12,''', and average accounts receivable of ?1',''0,'''.The firm#s cost of goods sold is 0$@ of sales.The company makes all purchases on credit and has always paid on the 'th day.Dowever, it now plans to take full advantage of trade credit and to pay its suppliers on the "'th day.The (F5 also believes that sales can be maintained at the e8isting level but inventory can be lowered by ?1,1",,''' and accounts receivable by ?1,1",,'''.=hat will be the net change in the cash conversion cycle, assuming a ,$/day yearCa. /2,., daysb. /21.$ daysc. /2.0 daysd. /,." dayse. /"'.$ days(16*) &as( b%+get & S Answer: c.EDI6.1,. Nogueiras (orp9s budgeted monthly sales are ?$,''', and they are constant from month to month."'@ of its customers pay in the first month and take the 2@ discount, while the remaining ,'@ pay in the monthfollowing the sale and do not receive a discount.The firm has no bad debts.Aurchases for ne8t month9s sales are constant at $'@ of pro:ected sales for the ne8t month.P5ther payments,Q which include wages, rent, and ta8es, are 2$@ of sales for the current month.(onstruct a cash budget for a typical month and calculate the average net cash flow during the month.a. ?1,'12b. ?1,1$'c. ?1,21'd. ?1,2.1e. ?1,"& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 36 Prole!" Chapter 16:Working Capital& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 37(166) /ockbo0 & S Answer: +.EDI6.1.. =hitmer 2nc. sells to customers all over the >.4., and all receipts comein to its headquarters in New Lork (ity.The firm#s average accounts receivable balance is ?2.$ million, and they are financed by a bank loanat an 11@ annual interest rate.The firm is considering setting up a regional lockbo8 system to speed up collections, and it believes this would reduce receivables by 2'@.2f the annual cost of the system is ?1$,''', what pre/ta8 net annual savings would be reali-edCa. ?21,1,'b. ?2,"''c. ?,,'''d. ?"','''e. ?"",'''(165) 4ra+e cre+it: no# cost & S Answer: a.EDI6.10. % firm buys on terms of ;1$, net "$.2t does not take the discount, and it generally pays after ,' days.=hat is the nominal annual percentage cost of its non/free trade credit, based on a ,$/day yearCa. 2$.'1@b. 2..$1@c. '.$@d. .1@e. ,..@(165) 4ra+e cre+it: no# cost & S Answer: e.EDI6.11. %tlanta (ement, 2nc. buys on terms of 2;1$, net '.2t does not take discounts, and it typically pays ,' days after the invoice date.Net purchases amount to ?.2',''' per year.=hat is the nominal annual percentage cost of its non/free trade credit, based on a ,$/day yearCa. 1'.0,@b. 12.'.@c. 1."1@d. 1".1'@e. 1,.$$@(165) 4ra+e cre+it: no# cost & S Answer: b.EDI6.1''. Lour company has been offered credit terms of ";', net 1' days.=hat will be the nominal annual percentage cost of its non/free trade credit if it pays 12' days after the purchaseC3%ssume a ,$/day year.6a. 1,.'$@b. 1,.1'@c. 1..."@d. 10.,@e. 11.$,@& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 38 Prole!" Chapter 16:Working Capital(165) 4ra+e cre+it: EA3 cost & S Answer: +.EDI6.1'1. Bumpas Fnterprises purchases ?",$,2,$'' in goods per year from its sole supplier on terms of 2;1$, net $'.2f the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non/free trade creditC3%ssume a ,$/day year.6a. 2'.11@b. 21.1.@c. 22.20@d. 2."$@e. 2".,@(165) 4ra+e cre+it:EA3 cost & S Answer: c.EDI6.1'2. % firm buys on terms of 2;0, net "$ days, it does not take discounts, and it actually pays after $0 days.=hat is the effective annual percentage cost of its non/free trade creditC 3>se a ,$/day year.6a. 1"."@b. 1$.1'@c. 1$.01@d. 1,.,1@e. 1..$2@(165) Free tra+e cre+it & S Answer: a.EDI6.1'. Buskirk (onstruction buys on terms of 2;1$, net ,' days.2t does not take discounts, and it typically pays on time, ,' days after the invoicedate.Net purchases amount to ?"$',''' per year.5n average, how much PfreeQ trade credit does the firm receive during the yearC3%ssume a ,$/day year, and note that purchases are net of discounts.6a. ?10,"1b. ?11,"10c. ?2',01d. ?21,"'0e. ?22,".1(165) &ostly tra+e cre+it & S Answer: a.EDI6.1'". 2ngram 5ffice 4upplies, 2nc., buys on terms of 2;1$, net $' days.2t does not take discounts, and it typically pays on time, $' days after the invoice date.Net purchases amount to ?"$',''' per year.5n average, what is the dollar amount of costly trade credit 3total credit R free credit6 the firm receives during the yearC3%ssume a ,$/day year, and note that purchases are net of discounts.6a. ?",1$1b. ?"$,'0c. ?".,$."d. ?"1,1$2e. ?$2,"$'& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 3915 50 da ys 365 2 1002 (165) &ostly tra+e cre+it & S Answer: a .EDI6.1'$. *oton 2nc. purchases merchandise on terms of 2;1$, net "', and its grosspurchases 3i.e., purchases before taking off the discount6 are ?0'',''' per year.=hat is the ma8imum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier9s credit termsC3%ssume a ,$/day year.6a. ?$,,11b. ?$,,0"c. ?$1,2'd. ?,2,1,e. ?,$,2.1(165) 4otal tra+e cre+it & S Answer: a.EDI6.1',. Sirk !evelopment buys on terms of 2;1$, net ,' days.2t does not take discounts, and it typically pays on time, ,' days after the invoice date.Net purchases amount to ?$$',''' per year.5n average, what is the dollar amount of total trade credit 3costly I free6 the firm receives during the year, i.e., what are its average accounts payableC3%ssume a ,$/day year, and note that purchases are net of discounts.6a. ? 1',"11b. ? 1",12c. ? 11,,.0d. ?1'",,,2e. ?1'1,01$(165) Stretc(ing accts payable & S Answer: e.EDI6.1'.. %ffleck 2nc.#s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1;1' net 2', and it currentlytakes the discount.5ne way of getting the needed funds would be to forgo the discount, and the firm#s owner believes she could delay payment to "' days without adverse effects.=hat would be the effectiveannual percentage cost of funds raised by this actionC3%ssume a ,$/day year.6a. 1'.$1@b. 11.1$@c. 11.."@d. 12.,@e. 1.'1@& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 40 Prole!" Chapter 16:Working Capital(161!) 3e'ol'ing cre+it agree#ent & S Answer: b.EDI6.1'0. =eiss 2nc. arranged a ?1,''',''' revolving credit agreement with a groupof banks.The firm paid an annual commitment fee of '.$@ of the unused balance of the loan commitment.5n the used portion of the revolver, itpaid 1.$@ above prime for the funds actually borrowed on a simple interest basis.The prime rate was .2$@ during the year.2f the firm borrowed ?,,''',''' immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annualcost of the revolverCa. ?20$,'''b. ?'','''c. ?1$,'''d. ?',.$'e. ?".,200(16)) &as( con'ersion cycle & S Answer: a;A3D1'1. 4oenen 2nc. had the following data for 2''0 3in millions6.The new (F5 believes that the company could improve its working capital management sufficiently to bring its N=( and ((( up to the benchmark companies# level without affecting either sales or the costs of goods sold.4oenenfinances its net working capital with a bank loan at an 0@ annual interest rate, and it uses a ,$/day year.2f these changes had been made, by how much would the firm#s pre/ta8 income have increasedC 5riginalBenchmark!ata *elated ((((((4ales ?1'','''(ost of goods sold ?0','''2nventory 32(A6 ?2',''' 11.2$ 0.''*eceivables 3!456 ?1,,''' $0."' 2'.''Aayables 3A!A6 ?$,'''22.01 '.''12,.0" 20.''a. 1,1'1b. 2,'12c. 2,'1d. 2,$1e. 2,.0"& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 41(16)) &as( con'ersion cycle & S Answer: c;A3D11'. +argetis 2nc. carries an average inventory of ?.$','''.2ts annual sales are ?1' million, its cost of goods sold is .$@ of annual sales, and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net ' days, and it pays on time.2ts new (F5 wants to decrease the cash conversion cycle by 1' days, based on a ,$/day year.De believes he can reduce the average inventory to ?,".,2,' with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycleCa. ?12,,'b. ?1',1.c. ?1,,10,d. ?1",0,e. ?1$1,'2.(165) 4ra+e cre+it: EA3 cost & S Answer: b;A3D111. 4uppose the credit terms offered to your firm by its suppliers are 2;1' net ' days.Lour firm is not taking discounts, but is paying after 2$ days instead of waiting until !ay '.Lou point out that the nominal cost of not taking the discount and paying on !ay ' is appro8imately .@.But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost 3not the nominal cost6 of its costly trade credit, using a ,$/day yearCa. ,'.@b. ,.$@c. ,,..@d. .'.'@e. ..$@(165) Acco%nts payable balance & S Answer: e;A3D112. %ggarwal 2nc. buys on terms of 2;1' net ', and it always pays on the 'th day.The (F5 calculates that the average amount of costly trade credit carried is ?.$,'''.=hat is the firm#s average accounts payablebalanceC%ssume a ,$/day year.a. ?"$0,1,'b. ?"02,2.c. ?$'.,,$,d. ?$",.$e. ?$,2,$''& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 42 Prole!" Chapter 16:Working Capital(165) Fin st#ts an+ tra+e cre+it & S Answer: +;A3D11. Mon-ales (ompany currently uses ma8imum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2;1' net ' days, and the firm pays on time.The new (F5 is considering borrowing from its bank, using short/term notes payable, and then taking discounts.The firm wants to determine the effect of this policy change on its net income.2ts net purchases are ?11,.,' per day, using a ,$/day year.The interest rate on the notes payable is 1'@, and the ta8 rate is "'@.2f the firm implements the plan, what is the e8pected change in net incomeCa. ?2,1,"b. ?",,11c. ?,,$2,d. ?0,""0e. ?"',.'(&o#p) In'entory t%rno'er an+ DS8 & S Answer: c;A3D11". Narruk (onstruction9s !45 is $' days 3on a ,$/day basis6, accounts receivable are ?1'' million, and its balance sheet shows inventory of ?12$ million.=hat is the inventory turnover ratioCa. "..b. $.2,c. $.0"d. ,."2e. ..'.& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 43(&o#p) "orking capital< F&F & S Answer: b;A3D11$. +adura 2nc. wants to increase its free cash flow by ?10' million during the coming year, which should result in a higher FO% and stock price.The (F5 has made these pro:ections for the upcoming year< FB2T is pro:ected to equal ?0$' million. Mross capital e8penditures are e8pected to total to ?,' million versus depreciation of ?12' million, so its net capital e8penditures should total ?2"' million. The ta8 rate is "'@. There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.=hat increase in net working capital 3in millions of dollars6 would enable the firm to meet its target increase in F(FCa. ? .2b. ? 1'c. ?1'0d. ?1'e. ?1$,Multiple Part:(The following data apply to Problems 136-138.)Norn (orporation is deciding whether to pursue a restricted or rela8ed currentasset investment policy.The firm#s annual sales are e8pected to total ?,,'',''', its fi8ed assets turnover ratio equals ".', and its debt and common equity are each $'@ of total assets.FB2T is ?1$',''', the interest rate on the firm#s debt is 1'@, and the ta8 rate is "'@.2f the company follows a restricted policy, its total assets turnover will be 2.$.>nder a rela8ed policy its total assets turnover will be 2.2.(161) "& in'est#ent policy & S Answer: +.EDI6.11,. 2f the firm adopts a restricted policy, how much lower would its interest e8pense be than under the rela8ed policyCa. ? 0,"10b. ? 0,0,1c. ? 1,2.d. ? 1,010e. ?1','1& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 44 Prole!" Chapter 16:Working Capital(161) "& in'est#ent< 38E & S Answer: b.EDI6.11.. =hat#s the difference in the pro:ected *5Fs under the restricted and rela8ed policiesCa. 1.2'@b. 1.$'@c. 1.0'@d. 2.1,@e. 2.$1@& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital Prole!" Page 45(161) "& in'est#ent< 38E & S Answer: a.EDI6.110. %ssume now that the company believes that if it adopts a restricted policy, its sales will fall by 1$@ and FB2T will fall by 1'@, but its total assets turnover, debt ratio, interest rate, and ta8 rate will all remain the same.2n this situation, what#s the difference between the pro:ected *5Fs under the restricted and rela8ed policiesCa. 2.2"@b. 2.",@c. 2..'@d. 2.10@e. .2.@& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Page 46 Prole!" Chapter 16:Working Capital!*-&E#- !*D -'L.T)'*-& 2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned, copied or duplicated, or postedto a publicly accessible website, in whole or in part.Chapter 16:Working Capital #n"$er" Page 47CH!"TE# $%1(16 Intro) Net working capital F S Answer: bEASY2(16 Intro) Net working capital F S Answer: bEASY(16 Intro) Days of working capital F S Answer: aEASY"(16!) "orking capital #anage#ent F S Answer: aEASY$(16!) "orking capital financing F S Answer: bEASY,(16!) $er#anent c%rr oper assetsF S Answer: aEASY.(16!) &onser'ati'e fin approac( F S Answer: aEASY0(16!) Aggressi'e fin approac( F S Answer: aEASY1(16)) &as( con'ersion cycle F S Answer: bEASY1'(16)) &as( con'ersion cycle F S Answer: bEASY11(16*) &as( b%+get F S Answer: aEASY12(16,) -oal of cas( #anage#ent F S Answer: aEASY1(16,) .oti'es for (ol+ing cas( F S Answer: aEASY1"(166) Float F S Answer: aEASY1$(166) /ockbo0 F S Answer: aEASY1,(161) -oal of in'entory #anage#ent F S Answer: bEASY1.(161) -oal of in'entory #anage#ent F S Answer: aEASY10(162) 3ecei'ables balance F S Answer: aEASY11(162) 3ecei'ables aging F S Answer: bEASY2'(162) .onitoring recei'ables F S Answer: aEASY21(162) &re+it policy F S Answer: aEASY22(162) &ollection policy F S Answer: aEASY2(162) 4aking +isco%nts F S Answer: aEASY2"(162) &(ange in cre+it policy F S Answer: aEASY2$(165) 4ra+e cre+it F S Answer: bEASY2,(165) 4ra+e cre+it F S Answer: bEASY2.(165) 4ra+e cre+it F S Answer: aEASY20(165) 4ra+e cre+it F S Answer: aEASY21(165) 4ra+e cre+it F S Answer: aEASY'(165) &ost of tra+e cre+it F S Answer: aEASY1(165) &ost of tra+e cre+it & S Answer: aEASY2(165) &ost of tra+e cre+it F S Answer: aEASY(161!) 3e'ol'ing cre+it F S Answer: aEASY"(16!) .at%rity #atc(ing F S Answer: a.EDI6.$(16!) .at%rity #atc(ing F S Answer: b.EDI6.,(16!) Aggressi'e financing F S Answer: a.EDI6..(16!) Aggressi'e financing F S Answer: b.EDI6.0(16)) &as( con'ersion cycle F S Answer: a.EDI6.1(16)) &as( con'ersion cycle F S Answer: a.EDI6."'(16*) &as( b%+get F S Answer: b.EDI6."1(16*) &as( b%+get F S Answer: a.EDI6."2(16*) &as( an+ capital b%+gets F S Answer: b.EDI6."(16*) &as( b%+get an+ +epreciation F S Answer: b.EDI6.""(166) &as( flow sync(roni7ation F S Answer: a.EDI6."$(166) /ockbo0 & S Answer: b.EDI6.Funds generated = Days saved Checks per day = $375,000Return n !unds generated = Funds generated Rate ! return = $22,500 " $25,000",(162) 3ecei'ables balance F S Answer: b.EDI6.".(162) 3ecei'ables an+ growt( & SAnswer: b.EDI6.#ccunts rece$va%&e '$&& $ncrease %y 10()*hat percentage $ncrease 'u&d ccur regard&ess ! the &eve& ! the cash sa&es)+ven $! cashsa&es 'ere ,0(, rece$va%&es 'u&d st$&& $ncrease %y 10( under the assu-pt$ns $n the .uest$n)"0(162) 3ecei'ables an+ growt( & S Answer: a.EDI6."1(162) &ollection policy F S Answer: a.EDI6.$'(162) &as( 's cre+it sales F SAnswer: b.EDI6.Depart-ent stres, aut dea&ers,and -any thers se&& n cred$t, us$ng $nterest %ear$ng ntes paya%&e)*he $nterest rate n th$s cred$t can e/ceed the !$r-0s cst ! cap$ta&, -ak$ng cred$t sa&es -re pr!$ta%&e than cash sa&es)$1(162) DS8 an+ past9+%e acco%nts & S Answer: b.EDI6.$2(165) 4ra+e cre+it F S Answer: b.EDI6.$(16 Intro) "orking capital & S Answer: cEASY$"(16!) &%rrent asset financing & S Answer: aEASY$$(16)) &as( con'ersion cycle & S Answer: bEASY$,(166) /ockbo0 & S Answer: +EASY$.(166) /ockbo0 & S Answer: eEASY$0(162) &re+it policy & S Answer: eEASY$1(16!) &%rrent asset financing & S Answer: c.EDI6.,'(16!) &%rrent asset financing & S Answer: b.EDI6.,1(16)) &as( con'ersion cycle & S Answer: +.EDI6.,2(16)) &as( con'ersion cycle & S Answer: a.EDI6.,(16*) &as( b%+get & S Answer: b.EDI6.,"(16*) &as( b%+get & S Answer: a.EDI6.,$(16*) &as( b%+get & S Answer: b.EDI6.,,(16*) &as( b%+get & S Answer: e.EDI6.,.(161) In'entory #anage#ent & S Answer: b.EDI6.,0(162) 3ecei'ables #anage#ent & S Answer: b.EDI6.,1(162) Days sales o%tstan+ing (DS8) & S Answer: c.EDI6..'(161:) .arketable sec%rities & S Answer: c.EDI6..1(161:) .arketable sec%rities & S Answer: +.EDI6..2(&o#p) &%rrent asset financing & S Answer: b.EDI6..(&o#p) &%rrent asset financing & S Answer: a.EDI6.."(&o#p) S(ort9ter# financing & S Answer: a.EDI6..$(&o#p) "orking capital policy & S Answer: +.EDI6..,(&o#p) "orking capital concepts & S Answer: b.EDI6...(&o#p) "orking capital concepts & S Answer: c.EDI6..0(16!) .at%rity #atc(ing & S Answer: eEASY1'er tta& asset range $320,0002pper tta& asset range $310,0004$n$-u- tta& assets = F# 5 4$n) C# = $320,000 = 1* De%t 5 +.u$ty# -atur$ty -atch$ng p&$cy $-p&$es that !$/ed assets and per-anent current assets are !$nanced '$th &ng6ter-surces)*h$s $s $ts -st &$ke&y &eve& ! &ng6ter- !$nanc$ng).1(16)) &as( con'ersion cycle & S Answer: +EASY7nventry cnvers$n per$d = 50 days#verage c&&ect$n per$d = 17 days8aya%&es de!erra& per$d = 25 daysCCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 32 days0'(16)) &as( con'ersion cycle & S Answer: bEASY7nventry cnvers$n per$d = 3: days#verage c&&ect$n per$d = 1, days8aya%&es de!erra& per$d = 20 daysCCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 37 days01(16)) &as( con'ersion cycle & S Answer: bEASY7nventry cnvers$n per$d = 31 days#verage c&&ect$n per$d = 31 days8aya%&es de!erra& per$d = 3: daysCCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 33 days02(16)) &as( con'ersion cycle & S Answer: +EASYCCC = 7nv) cnv) per$d 5 #vg)c&&) per$d 9 8ay) de!erra& per$d#ge ! rece$va%&es = #vg) c&&) per$d = 35 days#ge ! $nventry = 7nv) cnv) per$d = 6, days#ge ! paya%&es = 8ay) de!) per$d = 30 daysCCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 73 days0(16*) &as( b%+get & S Answer: +EASY8ay-ents;Cash 20(8ay 2nd -nth 30(8ay 3rd -nth 30(C&&ect$ns r$g$na& D@ >r$g) rece$va%&es = $,,,730.(16)) In'entory con' perio+ & SAnswer: +.EDI6.4nth&y C>E< = $2,000,0007nventryAC>E< = 50)0(#nnua& C>E< = $23,000,000#vg) $nventry = $1,000,0007nv) cnv) per$d = 7nv)AC>E< per day = 7nv)A?#nnua& C>Er$g$na& Bench-ark 7C8 atDataRe&ated 7C8 7C8 Bench-ark 1eve&Cst ! gds s&d $:5,0007nventry and 7C8 $20,000 :5):: 3:)00De' $nventry = 7C8 ?C>Er$g$na& 7nv) 9 De' 7nv) = $11,151#&ternat$ve s&ut$n; ?Change $n 7C8A>r$g$na& 7C8@ >r$g) 7nv) = $11,15101(16)) $ayables +eferral perio+ & SAnswer: e.EDI6.>r$g$na& Bench-ark 8aya%&es atDataRe&ated 8D8 8D8 Bench-ark 1eve&Cst ! gds s&d $75,0007nventry and 8D8 $5,000 23)33 30)00De' paya%&es = 8D8 ?C>EEE< per day = 36)35#vg) c&&) per$d = Rece$va%&esAE< per day = 27):1CCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 33)76 days12(16)) &as( con'ersion cycle & SAnswer: +.EDI6.#nnua& sa&es $35,000#nnua& cst ! gds s&d ?C>EE< per day = 53)75#vg) c&&) per$d = Rece$va%&esAE< per day = 30)32CCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 3:),3 days1(16)) &as( con'ersion cycle & S Answer: a.EDI6. >r$g$na& Rev$sed#nnua& sa&es; unchanged $110,000 $110,000Cst ! gds s&d; unchanged $:0,000 $:0,000#verage $nventry; &'ered %y $3,000 $20,000 $16,000#verage rece$va%&es; &'ered %y $2,000 $16,000 $13,000#verage paya%&es; $ncreased %y $2,000 $10,000 $12,000Days $n year 365 3657nv) cnv) per$d = 7nv)A?C>Er$g$na& Bench-ark Bench-arkData Re&ated CCCCCC1eve&s Er$g) #AR 9 De' #AR = $136,,:6111(165) 4ra+e cre+it: EA3 cost & S Answer: b;A3DD$scunt (2( Det days 30D$scunt days 10 #ctua& days t pay-ent 25+#R = I1 5 D$sc) (A?100 9 D$sc) (@JI365A?#ctua& days 9 D$sc) 8er$d@J 9 1 = 63)3,(112(165) Acco%nts payable balance & S Answer: e;A3DD$scunt (2( Det days 30D$scunt days 10 #ctua& days t pay-ent 30Cst&y trade cred$t $375,000 KearsAday 365Cst&y trade cred$t = 8urchases per day ?Days cred$t $s utstand$ng 9 D$scunt per$d@$375,000 = 8urchases per day 208urchases per day = $1:,750Free trade cred$t = 8urchases per day D$scunt per$dFree trade cred$t = $1:,750 10Free trade cred$t = $1:7,500*ta& trade cred$t = Cst&y trade cred$t 5 Free trade cred$t*ta& trade cred$t = $375,000 5 $1:7,500*ta& trade cred$t = $562,50011(165) Fin st#ts an+ tra+e cre+it & S Answer: +;A3DD$scunt (2( Det days 30D$scunt days 10 #ctua& days t pay-ent 30Det purchasesAday $11,760 DaysAyear 365#nnua& $nterest rate 10)00( *a/ rate 30)00(#A8D d$sc) = Det purchasesAday #ctua& days t pay-ent#A8D d$sc) = $11,760 30 = $352,:00#A8D$sc) = Det purchasesAday D$scunt days#A8D$sc) = $11,760 10 = $117,600#-unt needed t %e !$nanced =#A8D d$sc) 9 #A8D$sc)#-unt needed t %e !$nanced = $352,:00 9 $117,600 = $235,200#dd$t$na& $nterest cst = #-unt needed t %e !$nanced #nnua& $nterest rate#dd$t$na& $nterest cst = $235,200 10)00( = $23,520Erss purchases = ?Det purchasesAday 365@A?1 9 D$sc) (@Erss purchases = $11,760 365A,:)00( = $3,3:0,000D$scunts &st = Erss purchases D$scunt (D$scunts &st = $3,3:0,000 2)00( = $:7,600 8re6ta/ sav$ngs = D$scunts &st 9#dd$t$na& $nterest8re6ta/ sav$ngs = $:7,600 9 $23,520 = $63,0:0#!ter6ta/ sav$ngs = 8re6ta/ sav$ngs ?1 9 *@#!ter6ta/ sav$ngs = $63,0:0 60)00( = $3:,33:11"(&o#p) In'entory t%rno'er an+ DS8 & S Answer: c;A3DD50 DaysAyear 365Rece$va%&es $100 7nventry $1252se D e.uat$n t !$nd sa&es;D = Rece$va%&esA?+ = Det $nc-eA+.u$ty 6)50( 5)00(D$!!erence $n R>+s = 1)50(110(161) "& in'est#ent< 38E& SAnswer: a.EDI6.( Change $n sa&es 615)00(( Change $n +B7* 610)00(De' sa&es $3,060,000De' +B7* $135,000Restr$cted;*#*> = + = 2)23(